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RICS APC - P&D Pathway > Valuation > Flashcards

Valuation Flashcards

1
Q

What is the RICS Valuation – Global Standards (Red Book) (2021)

A

It is a set of global standards which sets out the procedural rules and guidance for written valuations. (It is not a valuation manual).

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2
Q

Why does the Red Book exist?

A

It exists to combine:

  • Professional
  • Technical
  • And performance standards

In order to deliver high quality valuation advice that meets the expectations of clients and third parties.

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3
Q

What is the purpose of the Red Book?

A

It is a set of global standards which sets out the procedural rules and guidance for written valuations. (It is not a valuation manual).

It provides –

  • Consistency
  • Transparency
  • Objectively global
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4
Q

What is the structure of / the Contents of the Red book?

A

Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards
Part 4 - Valuation Technical & Performance Standards
Part 5 - Valuation Practice Guidance Applications
Part 6 - International Valuation Standards

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5
Q

When was the Red Book last updated and what changes were made?

A

In Nov 2021 but came in effect from 31st Jan 2022.

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6
Q

What is mandatory and guidance?

A

PS and VPS are both mandatory.
VPGA ae guidance / advisory.

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7
Q

What were the main changes that were made when the Red Book was updated?

A
  • TOE must be clear that a valuation is Red Book Global compliant or not.
  • VPGA 1 – reference to IFRS 13 and IFRS 16. Need to provide reasonably possible fair value measurements.
  • VPGA 4 – profits method for certain trade related property e.g self-storage an flexible workspace.
  • VPGA 2 – loan security valuations – ESG and sustainability should form integral part of valuation approach.
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8
Q

What is included with VPGA 8

A

VPGA 8 Valuation of real property interests

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9
Q

Are there any instances where certain section of the RED Book may not apply?

A

Yes – there are 5 sections in relation to VPS 1 – 5

ALIES

  • Agency (producing guide price or opening of value
  • Litigation
  • Internal purposes
  • Expert Witness
  • Statutory
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10
Q

What are the Methods of Valuation?

A

1) Comparable
2) Residual
3) Investment
4) Profits
5) Depreciated Replacement Cost (Contractors)

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11
Q

What must you do before commencing a Valuation Instruction?

A

1) Competence
Are you competent to undertake work?

2) Independence
Any conflicts or personal interests? Who and why?

3) Terms of Engagement
Set out in writing your full confirmation of instructions to client prior to starting work and receive written confirmation of instruction.

Confirm the competence of the valuer

The extent and limitations of the valuers inspection must be stated.

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12
Q

What are the three Valuation approaches as set out in VPS (Red Book)?

A

1) Cost (depreciated replacement costs)
2) Market (comparable)
3) Income (investment, residual and profits methods)

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13
Q

What are the four bases of Valuation?

A
  • Market Value
  • Market Rent
  • Fair Value
  • Investment Value
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14
Q

In order from top to bottom what is the hierarchy of comparable evidence?

A

Comp

Investment

Residual

Profits

DRC

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15
Q

What is the definition of Market Value?

A

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction

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16
Q

What is the definition of Market Rent?

A

The estimated amount for which an interest in real property should be leased on the valuation date Between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction

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17
Q

What is the definition of Investment Value?

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.

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18
Q

What is the definition of Fair Value

A

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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19
Q

Does Fair Value differ from MV

A

The RICS view the definition of Fair Value as being generally consistent with the definition of MV.

However – Market Value is the estimated amount for which an asset or liability should exchange on a given date between a willing buyer and willing seller at an arm’s length transaction after proper marketing where all parties have acted knowledgably, prudently and without compulsion

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20
Q

When is fair value used?

A

Companies that have adopted IFRS.

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21
Q

When would you use income approach?

A

The income producing ability of the asset is the critical element affecting value.

Include Residual, Investment, and profits.

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22
Q

What is the difference between an assumption and a special assumption?

A

An assumption is made where it is reasonable for the valuer to accept that something is true without the need for special investigation

A special assumption is supposition that is taken to be true and accepted as fact, even though it is not true and that do not apply at the valuation date (for example, they may have a valuation based on land having planning consent when none has yet be granted)

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23
Q

When do use the comparable valuation?

A

When there is a good body of recent comparable sales evidence

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24
Q

What are the 6 steps for using the comparable method?

A

1) Search and select comparables

2) Confirm/verify details and analyse headline rent to give a net effective rent as appropriate.

3) Assemble comparables in schedule.

4) Adjust comparables using the hierarchy of evidence.

5) Analyse comparables for form opinion of value - cross reference with registered value / boss.

6) Repot value and prepare file note.

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25
Q

What is the hierarchy of comparable evidence?

A

Category A – Direct Comparables. This category relates to all types of relevant Transactional Comparable Evidence
Category B – General Market Data. This category relates to data than can provide guidance rather than a direct indication of value
Category C – Other Sources. There is also a wide range of data that might provide broad indications of value

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25
Q

What is Professional Sceptism?

A

It is an attitude that includes:

  • Question the mind
  • Critically assessing evidence relies on in the valuation
  • Being alert to conditions that may cause information provided to be misleading
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26
Q

What do you do for second hand comparable data?

A

If it’s not RED BOOK – it’s my opinion but I always cross reference comps (especially second hand with a local agent).

27
Q

How would you find relevant comparables?

A
  • Landstack
  • Rightmove
  • EPC Register
    -Visit / speak to local agents
    -Speak to local developers
28
Q

What is the most common comparator?

A

Rate per Sq. ft or Rate per Sq. M

29
Q

What comparators would you use to value a car park?

A

Income per space

30
Q

What comparator would you use for a hotel?

A

Rate per bedroom unit

31
Q

How does the market use comparison?

A

To value a specific property by evaluating similar properties

32
Q

How accurate is comparable evidence?

A

I always verify comparable evidence to increase its accuracy, for example speaking to local agents.

However, I use my professional sceptism at all time if collecting evidence from secondary sources.

33
Q

What factors impact value?

A
  • Tenure
  • Use
  • Size
  • Specification
  • location
34
Q

Why is it important to gather/verify up to date accurate comparables?

A

Up to date – volatile market conditions

Accurate – reliable/basing valuations on it

35
Q

What is Zoning?

A

Zoning is specifically used for valuing retail property – more specifically high street units where the retail frontage is particularly valuable. This is different to industrial and office properties – which are valued on a simple rate per sqft / per sq m.

  • Zoning is NOT a method of Valuation, but a valuation technique.
  • Zoning is used for the comparison of retail properties to create a unit of comparison for different sized buildings.
36
Q

When is Zoning not used?

A

Zoning is not typically used for larger retail units e.g.

  • departmental stores,
  • supermarkets,
  • convenience stores,
  • retail warehouses

This is because the large size would skew the Zoned analysis (i.e resulting in an unjustifiably high overall rent)

37
Q

How would you Zone a property?

A
  • Use the halving back technique with 6.1m zones – apart from some prime London retail streets.
  • Basements/floors are usually related as A/10 depending on comparable evidence.
  • End allowances can be allowed for shape, such as split levels, excessive front to depth ratio and hard frontages.
38
Q

What are the allowances for Zoning?

A

There are a number of allowances, i.e. deductions or additions, that may be required to reflect the specific physical characteristics of the subject property. These should be derived from similar comparables and market experience.

39
Q

What is the technique used for hidden/obscure areas?

A

Masking

40
Q

What is the technique used for a shop with 2 main frontages?

A

Mirror

41
Q

What is natural zoning?

A

When the property zones reflect physical changes in the building, such as steps

42
Q

When is the Depreciated Replacement Cost used?

A

The DRC is used where there is active/direct market evidence is limited or unavailable for the asset being valued.

It is also where the comparison and income capitalisation approach cannot be applied.

43
Q

What types of assets are valued with the DRC method?

A
  • Sewage Works
  • Lighthouse
  • Submarine Base
  • Oil refineries
  • Power Stations
  • Mosques
44
Q

What is the methodology for DRC?

A

Value the land as land assuming planning permission for land.

Current cost of replacing an asset with its modern equiilvant minus its detrirince and obscelence.

45
Q

What is he basic principle of the Profits of Method of Valuation?

A

The value of the property depends on the profit generated from the business, not the physical building or location.

46
Q

What do you do if is a new business?

A

Use estimates / business plan.

47
Q

What is the simple methodology for Profits Method of Valuation?

A

Step 1 - Annual Turnover (income received) – costs / purchases = Gross Profit.

Step 2 - Gross Profit – reasonable working expenses – unjustified net profit

Step 3 - Unjustified net profit – operators’ remuneration = net profit known as Fair Maintainable Operating Profit.

48
Q

How does the investment method work?

A

The rental income is capitalised to produce a capital value.

Market Rent X Years Purchase = Market Value

49
Q

What is a Yield?

A

The annual return on investment expressed as a percentage of capital value.

50
Q

How is a yield measured?

A

Risk and the prospect of growth

51
Q

What is an All Risk Yield?

A

A growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.

52
Q

Comparable Evidence for Yields and Market Rent

A

You would use comparable evidence for yields and market rent to begin with.

53
Q

Risk is the major factor when determining a yield, in relation to the following factors

A
  • Prospects for rental and capital growth
  • Quality of location and covenant
  • Use of the property
  • Lease terms
  • Obsolescence. – likely future rates.
  • Voids – what is the risk?
  • Security and regularity of income
  • Liquidity – ease of sale.
54
Q

What is the conventional method of Valuation?

A

Market Rent X Years Purchase = Market Value

55
Q

What is Years Purchase?

A

The number of years required for its income to yield its purchase price.

56
Q

What is a return?

A

A return is the term used to describe the performance of a property.

57
Q

What is a Ransom Strip?

A

A ransom is usually a small piece of land that has been retained when a larger piece of land has been sold.

57
Q

Why do you have different yields for different properties?

A
  • Prospects for rental and capital growth
  • Quality of location and covenant
  • Use of the property
  • Lease terms
  • Obsolescence. – likely future rates.
  • Voids – what is the risk?
  • Security and regularity of income
  • Liquidity – ease of sale.
58
Q

What is Hope Value?

A

Hope value is the value rising from any expectation that future circumstances affecting the property may change.

59
Q

Why are ransom strips retained?

A

The purpose of retaining a ransom strip is, generally, to make a profit on that land in the future.

60
Q

What is the Valuation of a ransom strip?

A

Stokes vs Cambridge (1961) when a value of one third of the uplift in the development site value was awarded to the owner of the ransom strip.

61
Q

What is Marriage Value?

A

It is the additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.

62
Q

What is Margin of Error?

A

A Margin of Error is the permitted range allowed by courts, for example in respect to a valuation.

Generally, case law precedent refers to a margin between 10% and 15% - depending upon facts.

63
Q

What is Stamp Duty Land Tax?

A

SDLT is paid on the purchase of an interest in land as a percentage of the purchase consideration.

Stamp duty is a progressive tax.

64
Q

What is special value

A

When someone sees a property land as having much greater value than others.

RICS APC - P&D Pathway (15 decks)

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